Give yourself a minute and answer this question – What Do You Invest For?
Don’t read any further till you come up with atleast one specific answer for this question.
If you have an answer, then read further
. . . . . .
Many people think that aim of investing is to beat the markets.
It might not look wrong at first and may not be wrong for a few people*. But for most of us, investment is about much more than just beating the markets.
Is it Wrong to think that Only Aim of Investing is to Beat the Markets?
We invest (& you may call it saving if you want…though there is a big difference between saving and investing) for very few real reasons.
And one of those few reasons is to get the requiredsum of money whenyou need it.
The key words here are – Required Sum & When
I will give you an example for better understanding of this simple yet powerful statement.
Suppose you and your wife want to buy a car worth Rs 6 Lacs in One Year’s time. Now you know that you cannot pay the entire amount yourself and hence decide to opt for a car loan next year. And for that, you need to put in 20% as your contribution and rest would be funded by the bank.
Now 20% of Rs 6 Lacs is Rs 1,20,000 – amount you need to put in while buying the car.
Now you have 12 months to accumulate this money.
There are few options in front of you.
First is to save Rs 10,000 every month in a recurring deposit. After one year, you will have a little more than Rs 1.2 Lacs which you can then use to make a down payment for the car. This is plain and simple and without any risk.
Now suppose you decide that instead of following the first approach, you will put some money in rising stock market, in anticipation that your investment will grow larger in an year’s time. Since markets are rising, it is possible that you might hit some really good stocks and multibaggers which are able to make much more than the required Rs 1.2 lacs.
And who knows…. you might end up making the full 6 lacs in stocks!! 🙂
It is tough, but not impossible.
But when you put your money in stocks, there are 2 possibilities:
1) Markets go up and the value of your investment goes up.
2) Markets go down, and so does the value of your investment.
Will you then take this approach of putting money in stocks instead of safer instruments like Recurring Deposits?
It is risky. It can help you accumulate more than Rs 1.2 Lacs (may be 3 or even 6 lacs). But it is entirely possible that you are unlucky and when you really need those 1.2 Lacs, markets take a dip and your investments go down to 60 or 80,000. And that is less than what you need to reach your objective of buying a car.
You delay your purchase. Borrow more. Etc.
This effectively means that on the parameter of ‘Investment is an activity which provides required sum of money when you need it’, it is not able provide the required sum when needed with surety. It might provide more or it might provide less. But we cannot be sure of it.
You might say that such a case may only be applicable when one is investing for short term instead of saving. And you are right. One should save for short term and invest for long term. And savings, just like Investments should provide the required sum of money when required.
The statement – ‘Investment is an activity which provides required sum of money when we need it’ may not be the only correct definition of investment. But I feel it is a very important one. If we are not able to get the money when we really want, then what is the point of saving or investing?
We don’t want to live poor and die rich. Isn’t it?
What are your thoughts on this?
* The reference to few people (in first part of the post) is made to the class of rich people. They can have their own definition of investing. And that is because whatever sum of money they need for whatever, today or tomorrow, has already been earned by them. 🙂
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